Watch out for inflation expectation this week

This week on Wednesday, FOMC will be announcing monetary policy decisions. Investors should keep watch of inflation expectation to gauge, how the expectation might change in coming days and what might be influencing its move.

• Inflation expectation in US, as measured by 5 year 5 year (5y5y) forward inflation expectation rate reached peak of 2.17% in February 27, 2015 and from there dovish FOMC has pushed commentary in march has pushed expectation towards 1.94%.

Expectation pattern in 2015 indicating that inflation expectation might have bottomed out.

• In April, inflation expectation have risen steadily from below 2% and reached to new peak this year on Monday April 20th at 2.18% before settling at 2.08% on last Friday.

What might influence expectations this week?

• Upbeat forecast by FED for second and third quarter this year will provide upward pressure to inflation expectation, whereas in that case stronger dollar would provide headwinds.
  
  
• Effects would be somewhat similar, should FOMC choose to remain downbeat. In such case weaker dollar would provide support.
  
  
• In a third scenario, FOMC just might indicate delay in rate hike, which would push dollar downwards. In such case it would vital to gauge price of oil is exerting how much pressure to inflation expectation.

In latter half of the year dollar would find support in inflation expectation, should it keep rising steadily. Domestic demand is the key to US inflationary pressure.